* S&P 500 enjoys longest winning streak since January 2011
* Office Depot, OfficeMax in merger talks - source
* Health insurer shares fall on proposed gov't payment rates
* Indexes up: Dow 0.4 pct, S&P 0.6 pct, Nasdaq 0.4 pct
By Edward Krudy
NEW YORK, Feb 19 (Reuters) - U.S. stocks rose on Tuesday as this year's ongoing surge of merger activity suggested investors were still finding value in the market even as indexes hover near five-year highs.
Office Depot Inc surged 12.4 percent to $5.15 after a person familiar with the matter said the No. 2 U.S. office supply retailer was in advanced talks to merge with smaller rival OfficeMax Inc, which jumped 22 percent.
News of the potential move came just days after Berkshire Hathaway and a partner agreed to acquire H.J. Heinz Co for $23 billion, and a revised $20 billion takeover of Mexican brewer Grupo Modelo by Anheuser-Busch InBev .
Deal activity has helped equities resist a pullback as investors use dips in stocks as buying opportunities. The S&P is up about 7 percent so far in 2013 and has climbed for the past seven weeks in its longest weekly winning streak since January 2011, though most of the weekly gains have been slim.
"Deals are good for the market," said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago. "The fact that they're being done is a positive."
More than $158 billion in deals has been announced so far in 2013, more than double the activity in the same period last year and accounting for 57 percent of global deal volumes, according to Thomson Reuters Deals Intelligence.
The Dow Jones industrial average gained 54.19 points, or 0.39 percent, to 14,035.95. The Standard & Poor's 500 Index gained 9.66 points, or 0.64 percent, to 1,529.45. The Nasdaq Composite Index gained 13.53 points, or 0.42 percent, to 3,205.56.
Other stocks in the office supplies sector also rose. Larger rival Staples Inc shot up 12.9 percent to $14.61 as the best performer on the S&P 500.
"Equity investors have to be encouraged by M&A since, if the number crunchers are offering large premiums, that shows how much value is still in the market," said Mike Gibbs, co-head of the equity advisory group at Raymond James in Memphis, Tennessee.
On the downside, health insurance stocks tumbled, led by a 6.4 percent drop in Humana Inc to $72.99 after the company said the government's proposed 2014 payment rates for Medicare Advantage participants were lower than expected and would hurt its profit outlook.
UnitedHealth Group lost 1.9 percent to $56.25. The Morgan Stanley healthcare payor index dropped 1.6 percent.
Wall Street's strong start to the year for was fueled by better-than-expected corporate earnings, as well as a compromise by legislators in Washington that temporarily averted automatic spending cuts and tax hikes that are predicted to damage the economy.
The compromise on across-the-board spending cuts postponed the matter until March 1, at which point the cuts take effect. Ahead of the debate over the cuts, known as sequestration, further gains for stocks may be difficult to come by.
"If there's no major contention with sequestration, it looks like stocks are prepared to handle it, but until then we'll probably stay in a consolidation period marked by sideways trading with a slow rate of ascent," said Gibbs.
Economic data showed the NAHB/Wells Fargo Housing Market index unexpectedly edged down to 46 in February from 47 in the prior month as builders faced higher material costs.
According to the Thomson Reuters data through Monday morning, of the 391 companies in the S&P 500 that have reported results, 70.1 percent have exceeded analysts' expectations, compared with a 62 percent average since 1994 and 65 percent over the past four quarters.
Fourth-quarter earnings for S&P 500 companies have risen 5.6 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.
Express Scripts rose 1.7 percent to $56.49 after the pharmacy benefits manager posted fourth-quarter earnings.